• Sarabjeet Singh says he cleaned up his books when he became an original equipment manufacturer (OEM) with a foreign car-maker. • Rajeev Khanna, who makes speciality garment add-ons like elastic and buttons, has turned most of his Rs 5 crore business white due to falling bank interest rates, lower excise duties and in the anticipation of Value Added Tax (VAT). • Ghaziabad-based S Prasanna runs his entire pharma business in black but is gearing up to turn legit if the government sticks to the new VAT deadline. The stories are countless. Speak to any small to medium manufacturer and the anecdotal evidence is all there: economic reform is making it less profitable to keep money black and it is getting cheaper — and more lucrative — to declare your true income. The unravelling of the dense black economy has begun. Supporting this ground level reality is hard economic data. Says Dr Surjeet Bhalla, Managing Director of O(x)us Research and Investments: ‘‘If 80 to 85 per cent of income tax was not being paid six years ago, it is now down to 70 per cent. Compliance is definitely up.’’ Direct tax receipts have more than doubled to Rs 82,445 crore in 2002-03, and indirect tax collections have grown by 55 per cent since 1996-97 when tax rates were drastically cut. Policy changes that are inducing this trend are now beginning to work on one another. If on one side there is lesser tax to be paid, on the other are the carrots of having white income, like cheap home loan rates and bank credit. Some policy changes and reasons why we are turning white: • Falling tax rates. Personal income tax rates have fallen from a peak rate of 40 per cent of taxable income in 1996-97 to 30 per cent today. The corporate tax rate for domestic companies was reduced from 40 to 35 per cent. This has induced people in the highest tax bracket to declare incomes. ‘‘It is now easier to pay and sleep,’’ says Arvind Gupta, the owner of a Rs 8 crore business based in a Delhi suburb. • Falling sales and excise tax rates and easier compliance. Peak customs duties have been falling from 50 per cent in 1996-97 to 20 per cent today. Excise and sales tax rates have been rationalised and procedures simplified. ‘‘Earlier we had to go to the excise office each time our goods left the factory gate,’’ says Sunil Darshan, a UPS maker in Delhi. ‘‘Now we do the assessment ourselves and pay.’’ • Falling interest rates. This has encouraged people to access formal bank credit. With rates down to 12 to 14 per cent per annum, formal credit is driving out the 18 to 20 per cent informal credit money. But to access this money, the businessman needs to show some profit on the balance sheet and is forced to clean it up. Says V Vaidyanathan, Head Retail Channel ICICI Bank: ‘‘Our SME lending is growing at 80 per cent per annum for the last three years and stands today at Rs 5,000 crore.’’ • Increasing tie-ups with corporates and MNCs. Channel (vendor and supplier) finance is big with the banks. ‘‘I cleaned up my operation after a tie-up with a foreign car maker. They have a 50 per cent stake and I had to change the way I do business,’’ says Sarabjeet. Financing of this segment has gone up. Says Vaidyanathan: ‘‘Channel finance is growing at 100 per cent and we find this an efficient way to provide finance on a technology platform.’’ • Competition making volumes more important than margins. This makes keeping operations black more difficult. ‘‘We used to operate at 100 per cent margins and our business size was small. Now with competition, we are forced to grow in scale and then continuing to do business without proper accounting is difficult,’’ says Sunil Darshan, the UPS maker. • Increasing importance of bank financing in consumer buying. Loans are not just home loans any more, but auto, white goods and furniture loans are increasing. Says Arvind Singhal Managing Diretor, KSA Technopak: ‘‘This buying needs an invoice from the dealer so he has to report sales.’’ It also forces the consumer to declare his income to access the loan. • Less avenues to use black money. Black money finally needs to be spent. Earlier the stock market and property markets were outlets that absorbed this cash. With the stock market transparent and disclosure of PAN essential, this avenue is plugged for most people. Property still remains an outlet but is beginning to lose importance. Cheap home loans on one side demand white money and the conversion to the unit area method of property tax calculation, at least in Delhi, is beginning to nudge property deals towards a bigger white component. The final frontier? ‘‘VAT,’’ say most players. Once VAT is in operation, and there is a huge nudge to turn white and avail of its benefits, the whitewash will gather pace — and permanence. (The names of the businessmen in this story have been changed)
